Pavilion REIT is one of the 18 REITs listed in Malaysia. Listed in
2011, it owns four retail shopping malls and an office tower in the
Klang Valley. Its portfolio includes the renowned Pavilion Kuala Lumpur
Mall that is popular among tourists and locals including Pavilion Kuala
Lumpur Mall, Elite Pavilion Mall, Intermark Mall, DA MEN Mall, and
Pavilion Tower.
Here are 14 things to know about Pavilion REIT before you invest:1. Pavilion REIT derived 97.9% of its gross revenue in 2019 from its retail properties. Pavilion
REIT’s office property, Pavilion Tower, contributes only a very small
portion of the REIT’s gross revenue. Hence, the REIT can be broadly
regarded as a pure-play retail one.

2. Pavilion Kuala Lumpur Mall and Elite Pavilion Mall are the crown jewels of Pavilion REIT.
Both of these malls contributed to about 89.3% of the REIT’s gross
revenue in 2019. The two malls are connected to each other and located
in the bustling tourist spot of Bukit Bintang. Bukit Bintang is readily
accessible by public transport like the MRT and Monorail and is dotted
with prominent hotel chains. The malls are located at a strategic spot
as a sheltered air-conditioned pedestrian bridge also connects them to
KLCC. These malls generally serve the middle and upper-income segment
consumers and are premier shopping heavens for locals and tourists
alike. The malls are popular among locals, who make up 70% of the shoppers in both malls.4.Intermark Mall is situated near KLCC and is close to an LRT station.
It is a podium located below two office towers — Vista and Integra
Towers — as well as DoubleTree by Hilton Hotel Kuala Lumpur. It
generally serves the office crowd during weekdays and the hotel guests
in the vicinity. On the other hand, DA MEN Mall is a neighbourhood mall
serving the Subang Jaya community, which is about half an hour’s drive
from Bukit Bintang.5. Just like how Mapletree North Asia Commercial Trust relies on Festival Walk for 62% of its NPI, Pavilion REIT faces a similar concentration risk because it obtains revenue mainly from Pavilion Malls.
Festival Walk was damaged in a clash between anti-government protestors
and police. The mall had to be closed for two months before it was
reopened. Similar things could happen to Pavilion REIT but chances of
such incidences stemming from political uncertainties and racial
tensions happening in Malaysia are low at the moment.6. Asof 2019, there were 276 shopping malls, is equivalent to 78.4 million square feet of retail space, in the Klang Valley. The
glut in retail supply is evident in the Klang Valley as another 2.6
million square feet of retail space is in the pipeline. However,
well-maintained and strategically located malls like the Pavilion malls
will survive and be able to outcompete the weaker ones. Pavilion malls
are well-positioned as premium shopping destinations along the likes of
Genting Highlands Premium Outlets, Starhill Gallery, Suria KLCC, and The
Gardens Mall in the Klang Valley.7. Pavilion Malls are not spared from e-commerce disruption as the popularity of online shopping continues to grow. In
general, Malaysians still flock to shopping malls especially larger
ones during weekends as they offer free air-conditioning in this hot and
humid region and serve as a convenient meeting point. Again, Pavilion
malls target the upper-middle and high-income segments. Some shoppers
still prefer to buy luxurious goods in physical stores. Brick-and-mortar
stores are here to stay as they provide a different experience to
shoppers and they complement online shopping.8. Average property yield between 2012 and 2019 stood at 6.3%which is commendable, and is above the REIT’s 5.0%cost of debt in 2019. Investors
may want to take note that the DA MEN Mall only achieved a meagre 0.3%
property yield in 2019. This is due to the stiff competition the mall
experiences from neighbourhood malls like Sunway Pyramid and Subang
Parade. Also, DA MEN Mall has been suffering from declining occupancy
rates since its acquisition in 2016. As shown below, Elite Pavilion Mall
is the only mall that can be encumbered to a bank as collateral to
raise additional funds in the future.

Properties

Encumbrance

Tenure

Year of Acquisition

Property Yield (2019)

Pavilion Kuala Lumpur Mall

Yes

99-year leasehold expiring in 2109

2011

6.6%

Elite Pavilion Mall

No

About 95% of its net lettable area are freehold

2018

6.7%

Intermark Mall

Yes

Freehold

2016

8.0%

DA MEN Mall

Yes

Freehold

2016

0.3%

Pavilion Tower

Yes

99-year leasehold expiring in 2109

2011

4.4%

Source: Pavilion REIT annual reports

9. As Pavilion REIT acquired more retail properties,the number of leases it secured increased from 580in 2012 to 873in 2019. Revenue
contribution from the 1o largest tenants also decreased from 19.2% to
11.3% over the same period. Some of its notable tenants include Food
Republic, JD Sports, Parkson, and Royal Selangor.10. Sixty percent of Pavilion’s Kuala Lumpur Mall and 76% of
Elite Pavilion Mall’s tenancies by gross rental were about to expire in
2019. However, they recorded only a slight drop in occupancy
rate from 2018 to 2019. Overall, the occupancy rates of Pavilion malls
have been above 95.0% between 2012 and 2019 which is impressive as the
occupancy rate in the retail scene in Kuala Lumpur was just 82.9% in
2019.

Occupancy Rates

2012

2013

2014

2015

2016

2017

2018

2019

Pavilion Kuala Lumpur Mall

99.1%

96.2%

98.1%

98.5%

95.8%

98.9%

98.7%

98.0%

Elite Pavilion Mall

96.7%

95.0%

Intermark Mall

6.5%

90.0%

94.4%

97.1%

DA MEN MALL

87.0%

86.3%

74.4%

71.7%

Pavilion Tower

100.0%

100.0%

80.5%

98.0%

94.0%

98.5%

94.0%

85.8%

11. As the movement control order (MCO) was implemented in
Malaysia, Pavilion REIT has provided its retail tenants who provide
non-essential services with 14 days of free rent. The weighted
average lease expiry stood at 1.62 years in 2019. Pavilion REIT is
unlikely to secure renewals on short-term tenancy leases amidst the
COVID-19 outbreak. Pavilion REIT’s short-term gross revenue and its
ability to pay distribution will be temporarily affected. As life
elsewhere is slowly returning to normal post the COVID-19 peak, Pavilion
REIT can pull through the difficult times.12. Pavilion REIT still retains the right of first refusal for
fahrenheit88 shopping mall and Pavilion Hotel Kuala Lumpur managed by
Banyan Tree. These two properties are conveniently located in Bukit Bintang. The management will only consider yield-accretive assets with yields between 6.5% and 7%.
At the same time, the management is interested to own the Pavilion
Bukit Jalil mall post-construction although it previously turned down a
participation offer. The mall is currently owned by its sponsors, Qatar
Investment Authority and Malton Berhad.13. Based on unitholdings, the sponsors of Pavilion REIT are Qatar Investment Authority and Tan Sri Desmond Lim. Qatar Investment Authority is a state-owned sovereign wealth fund owned by the Qatari government. Tan Sri Desmond Lim
is one of the richest persons in Malaysia. He and his wife, Puan Sri
Cindy Tan sit on the board of Pavilion REIT and Malton Berhad, a listed
property developer. They collectively own about 37.1% of Pavilion REIT
and 37.4% of Malton.

Shareholder

Ownership

Qatar Investment Authority

33.2%

Tan Sri Desmond Lim Siew Choon

27.8%

Puan Sri Cindy Tan Kewi Yong

9.3%

14. Distribution per unit (DPU) has increased at a compounded annual growth rate of 3.1% since 2012. The
growth in DPU is mainly driven by positive rental reversions over the
years; and yield-accretive acquisitions of Intermark Mall in 2016 and
Elite Pavilion Mall in 2018. Pavilion REIT registered a slight drop in
DPU in 2019 because of lower rental incomes from Intermark Mall, DA MEN
Mall, and Pavilion Tower.

Source: Pavilion REIT annual reports

The fifth perspective

Overall, Pavilion REIT owns good-quality assets like the Pavilion malls
and stands to benefit from the flight-to-quality phenomenon among
retailers. Its relatively strong sponsors provide them with a
competitive edge to bargain for a lower cost of debt and a pipeline of
potentially yield-accretive assets. There is still room for growth as
its gearing stood manageably at 33.9% in 2019. Although the manager has
increased DPU almost every year except for 2019, the property yields of
DA MEN Mall and Pavilion Tower fell short of expectations.